Dealers’ biggest losses are seldom at the hands of thugs with masks and guns. Often, the most dangerous thugs use computers and postage stamps.
When times are tough, crooks intensify their efforts to scam dealers. But it is not just the crooks that dealers have to watch out for. Often, the culprits are legitimate suppliers who seek to be paid amounts to which they are not entitled.
While a sound payables policy is always important for dealers, in tough times it is critical to survival. What policies and procedures should a dealer implement to make sure it is paying only legitimate payables? How do you ensure that you get what you pay for?
Every dealer should have in place a policy for entering contracts that result in recurring payables, making sure that non-recurring payables are legitimate, and watching carefully the largest demands for payment most dealers see in tough times – repurchase demands from finance sources.
A Contract and Payable Policy
A dealer’s general office handles two kinds of payables – recurring and non-recurring. Each type requires policies to protect the dealership.
Recurring Charges
Recurring payables are generally the result of agreements that dealers enter for continuing services. Whether for uniforms, supplies of oil and transmission fluid, or dozens of other products and services used by dealership, the agreements dealers enter should be carefully reviewed. A dealer should have a contracting policy for suppliers.
- All requests to enter contracts with suppliers should be directed to senior management;
- Individual department managers and staff should not have the authority to sign contracts;
- Only senior managers should sign contracts;
- Senior management should do a cost/benefit analysis for every contract;
- Senior managers should understand the terms and conditions of the contracts that they sign;
- There must be standards to prevent the company from entering long term and automatically renewable contracts unless absolutely necessary;
- No monthly payables should be set up without senior management approval based on a signed agreement;
- The contracting policy should be regularly communicated to department heads and other staff; and
- When a dealer knows that a supplier has approached dealer personnel to form a relationship, the dealer should send a letter to the supplier alerting it that only designated senior managers may enter agreements.
Getting What the Agreement Promises
If a dealer has a sound policy in place, it is likely to enter contracts that benefit the company without unduly burdening it. However, the dealer then must regularly ask if the company is getting its money’s worth. When the dealer signs agreements that provide for fixed regular monthly payments, it’s generally easy to check that the supplier is providing what was promised. However, where a contract’s monthly payment is based on the units of product or service delivered, then the dealer must be much more careful. How does it know whether it is getting that for which it is invoiced, for example, by a lead generator that charges by the lead or a company that supplies uniforms, rags and walk off mats?
The general office should require dealership employees in charge of performance under the agreements to review bills monthly to be sure that the dealership is getting what it is entitled to. The approval that is sent to the office should include not only a sign off by the person who reviewed the matter, but documentation showing that the review took place.
Non-Recurring Charges
An invoice arrives at a dealership. Does the office simply pay it? Does your office route it to a manager who really doesn’t review it but just signs off to approve the payment? Non-recurring payments may be difficult to track, but there are things that should be done.
- A dealer should use a purchase order system. No non-recurring payments should be authorized without a purchase order. By this method, the office will know that someone made the decision to buy the product or service.
- All bills must be reviewed by a manager. The manager may have decided to purchase a product and issued a purchase order. However, did the dealership get what was ordered? Is the amount charged correct? The manager should check to be sure.
- The policy should require proof of receipt with manager approval. The office must require packing slips, bills of lading, advertising cuts, etc. as support for non-recurring payables.
General Precautions
Regardless of whether a dealership is dealing with recurring or non-recurring payables, there are precautions that should be in place.
- The dealer should know its vendors. Does the dealership have full contact information for a new vendor, or is it just sending payments to a P.O. box? When setting up payments for new vendors, the dealership should take some simple precautions to be sure that the vendors are listed in the phone book, or the dealer should get references from others with whom the suppliers have done business, or it should run an industry report about the supplier.
- Even when a dealership has policies in place, sometimes even the reviewers must be reviewed. A dealer should have a practice of regularly reviewing the performance of general office staff dealing with payables to be sure that they are requiring compliance with dealer policies. Employees respect what the dealer inspects.
Retail Finance Source Policy
Some of the most expensive demands for payment that dealers receive come from retail finance sources. The dealer delivers a vehicle on a retail installment sale contract. It assigns that contract to a finance source. Often, the finance source demands reimbursement of a part of the finance spread that is advanced to the dealer as a result of the customer paying the loan early or going into default. The dealer cannot avoid those obligations. They happen.
However, the most serious losses are generally the result of something the dealer can prevent – alleged breaches of the dealer’s representations and warranties that accompany every retail installment sale contract that is assigned. Then the finance source may demand that the dealer repurchase the contract. If the dealer can find the car the losses are generally tallied in the thousands. If the dealer cannot find the car, the losses are usually tallied in the tens of thousands. So how does a dealer avoid these liabilities?
Negotiate the Master Dealer Agreement.
The representations and warranties accompanying retail installment sale contracts are contained in the master dealer agreement. Dealers should negotiate the terms of those agreements to be sure that they can comply with them.
The details of the lender’s rights and remedies in the master dealer agreement are critical to a dealer if a customer defaults and the creditor wants the dealer to buy the RISC back. Dealers must understand what they represent and warrant. They must be sure that they can comply. Preferably, they should have you as their counsel review these agreements because of the substantial losses that can be generated when there is an alleged breach of a representation and warranty.
Here are some things to watch out for.
Warranty of Customer Information. Some agreements require dealers to warrant not only what they know and represent to the lender about the customer, but also that everything the customer has represented is true. While it is reasonable for the lender to require the dealer to represent that it has told the lender what it knows, it is overreaching for the lender to require a dealer to guarantee the truth of all representations made by the consumer. Any such warranty or representation should contain a “knowledge” of the dealer qualifier.
Insurance. Does the agreement require the dealer to verify insurance? Or does the agreement require the dealer to guarantee that fully paid insurance covers the vehicle for an extended duration? A lender requirement that the dealer verify insurance is appropriate. A lender requirement that the dealer guarantee the existence of insurance for an extended period is overreaching.
Vehicle Service. Does the agreement provide that the dealer will provide manufacturer-required maintenance and service? Clearly, the dealer has no control over whether the buyer will return to it for service, and a guarantee that the vehicle will be serviced according to manufacturer requirements often cannot be met.
Delivery Prior to Assignment. Does the agreement include a representation by the dealer that the vehicle was not delivered to the customer prior to assignment of the contract to the lender? In spot delivery situations, vehicles are always delivered to the customer prior to assignment of the contract to the lender. This is an obsolete representation that should be deleted.
Time to perfect a security lien. What period is given to the dealer to perfect a security lien? U. S. bankruptcy law was changed a few years ago to extend the period for perfection from twenty to thirty days. However, some agreements still require that liens be perfected within twenty days.
Sale of other products. Does the agreement limit the sale of other products such as extended service agreements? If so, is there a process for approval of the products the dealer sells? Or does the lender reserve to itself the right to determine what products may be sold? Quite clearly, the dealer should have an opportunity to sell its products in connection with a RISC assigned to a lender.
Scope of indemnification. For what does the dealer indemnify the lender? The lender is entitled to ask for indemnification for breaches of the indirect finance agreement or for improper actions by the dealer. However, the creditor should not require a dealer to indemnify a creditor against problems caused by the creditor, including actions as a result of the form retail installment sale contract or other documents that the creditor prepares and requires.
Complaints. Does the creditor have the right to demand that the dealer repurchase a RISC if the customer makes a complaint against the dealer? Or does that right accrue only after there has been some determination of the customer’s rights that affects the rights of the creditor under the retail installment sale contract? Never agree that a RISC can be tendered simply because there is a complaint raised by the customer or because there is a dispute between the customer and dealer before there is a decision about that dispute.
Remedies of the creditor. Be careful of the remedies of the creditor if there is a breach of the agreement. The creditor is entitled to demand that it may tender the RISC for repurchase. However, some master dealer agreements provide that upon a breach, the creditor can re-tender the entire portfolio. That is never acceptable.
Dealer/lender disputes. Where are dealer/lender disputes required to be determined? Where the lender does business? Or where the dealer does business? The lender comes to the dealer at the dealer’s location to have the dealer enter the master dealer agreement. If there is a dispute it should be decided where the dealer is located.
Many dealers assume that lenders will not negotiate the terms of the master dealer agreements. As with all agreements, the flexibility of the lenders depends upon the perceived market power of the parties. If a lender wishes to enter the dealer’s market or wants to establish a business relationship with the dealer, it is likely to have flexibility. If a dealer is chasing the lender to establish the relationship, there is likely to be less flexibility in the lender’s position. In any event, a dealer will not know what can be achieved until it engages the lender, or has you engage the lender, to discuss provisions of the agreement that the dealer finds onerous or oppressive.
Demands for Repurchase
In difficult financial times, finance sources are especially aggressive in their demands to repurchase contracts when the customer has defaulted. A dealer must carefully scrutinize every demand and challenge claims that the dealer did not comply with the master dealer agreement. Here are some common issues that finance companies raise.
- The deal contains a promissory note or a hold check for the down payment. What does the indirect finance agreement say? A hold check or a promissory note should not be a problem if the instrument was collected before the dealer assigned the retail installment sale contract to the finance company, but that depends upon the language of the master dealer agreement.
- The customer does not have insurance. What does the agreement say? If the dealer was careful in negotiating the agreement provision on insurance, the dealer should only have been required to verify insurance at the time the retail installment sale contract was done.
- The debtor’s signature or the cosigner’s signature on the RISC was forged. A finance company may even have an affidavit of forgery. A dealer should not blindly accept a claim of forgery. Customers unhappy with their obligations, especially cosigners, will often complain that they never signed the RISC. Check the details of the transaction carefully. If the dealer can prove that the RISC was appropriately signed, it should challenge the finance company as well as the customer claiming a forgery.
- The customer went bankrupt and the lien was not perfected in time. Under Federal bankruptcy law, a dealer has 30 days from the time the customer takes possession of the vehicle to perfect the lien and protect the creditor’s security in the event the customer declares bankruptcy. Under Virginia law, perfection is achieved when the paperwork is processed or filed, not when DMV finally notes the lien. A dealer should carefully check the claim of the finance company. If the vehicle was delivered after the papers were signed, it is the delivery date that controls. In Virginia where a lien is deemed perfected when the paperwork is filed or processed, the dealer may have complied with its obligation.
A solid policy may protect a dealer against significant losses. In difficult times, that may be the difference between making it through or not.
Dealers’ biggest losses are seldom at the hands of thugs with masks and guns. Often, the most dangerous thugs use computers and postage stamps.
When times are tough, crooks intensify their efforts to scam dealers. But it is not just the crooks that dealers have to watch out for. Often, the culprits are legitimate suppliers who seek to be paid amounts to which they are not entitled.
While a sound payables policy is always important for dealers, in tough times it is critical to survival. What policies and procedures should a dealer implement to make sure it is paying only legitimate payables? How do you ensure that you get what you pay for?
Every dealer should have in place a policy for entering contracts that result in recurring payables, making sure that non-recurring payables are legitimate, and watching carefully the largest demands for payment most dealers see in tough times – repurchase demands from finance sources.
A Contract and Payable Policy
A dealer’s general office handles two kinds of payables – recurring and non-recurring. Each type requires policies to protect the dealership.
Recurring Charges
Recurring payables are generally the result of agreements that dealers enter for continuing services. Whether for uniforms, supplies of oil and transmission fluid, or dozens of other products and services used by dealership, the agreements dealers enter should be carefully reviewed. A dealer should have a contracting policy for suppliers.
- All requests to enter contracts with suppliers should be directed to senior management;
- Individual department managers and staff should not have the authority to sign contracts;
- Only senior managers should sign contracts;
- Senior management should do a cost/benefit analysis for every contract;
- Senior managers should understand the terms and conditions of the contracts that they sign;
- There must be standards to prevent the company from entering long term and automatically renewable contracts unless absolutely necessary;
- No monthly payables should be set up without senior management approval based on a signed agreement;
- The contracting policy should be regularly communicated to department heads and other staff; and
- When a dealer knows that a supplier has approached dealer personnel to form a relationship, the dealer should send a letter to the supplier alerting it that only designated senior managers may enter agreements.
Getting What the Agreement Promises
If a dealer has a sound policy in place, it is likely to enter contracts that benefit the company without unduly burdening it. However, the dealer then must regularly ask if the company is getting its money’s worth. When the dealer signs agreements that provide for fixed regular monthly payments, it’s generally easy to check that the supplier is providing what was promised. However, where a contract’s monthly payment is based on the units of product or service delivered, then the dealer must be much more careful. How does it know whether it is getting that for which it is invoiced, for example, by a lead generator that charges by the lead or a company that supplies uniforms, rags and walk off mats?
The general office should require dealership employees in charge of performance under the agreements to review bills monthly to be sure that the dealership is getting what it is entitled to. The approval that is sent to the office should include not only a sign off by the person who reviewed the matter, but documentation showing that the review took place.
Non-Recurring Charges
An invoice arrives at a dealership. Does the office simply pay it? Does your office route it to a manager who really doesn’t review it but just signs off to approve the payment? Non-recurring payments may be difficult to track, but there are things that should be done.
- A dealer should use a purchase order system. No non-recurring payments should be authorized without a purchase order. By this method, the office will know that someone made the decision to buy the product or service.
- All bills must be reviewed by a manager. The manager may have decided to purchase a product and issued a purchase order. However, did the dealership get what was ordered? Is the amount charged correct? The manager should check to be sure.
- The policy should require proof of receipt with manager approval. The office must require packing slips, bills of lading, advertising cuts, etc. as support for non-recurring payables.
General Precautions
Regardless of whether a dealership is dealing with recurring or non-recurring payables, there are precautions that should be in place.
- The dealer should know its vendors. Does the dealership have full contact information for a new vendor, or is it just sending payments to a P.O. box? When setting up payments for new vendors, the dealership should take some simple precautions to be sure that the vendors are listed in the phone book, or the dealer should get references from others with whom the suppliers have done business, or it should run an industry report about the supplier.
- Even when a dealership has policies in place, sometimes even the reviewers must be reviewed. A dealer should have a practice of regularly reviewing the performance of general office staff dealing with payables to be sure that they are requiring compliance with dealer policies. Employees respect what the dealer inspects.
Retail Finance Source Policy
Some of the most expensive demands for payment that dealers receive come from retail finance sources. The dealer delivers a vehicle on a retail installment sale contract. It assigns that contract to a finance source. Often, the finance source demands reimbursement of a part of the finance spread that is advanced to the dealer as a result of the customer paying the loan early or going into default. The dealer cannot avoid those obligations. They happen.
However, the most serious losses are generally the result of something the dealer can prevent – alleged breaches of the dealer’s representations and warranties that accompany every retail installment sale contract that is assigned. Then the finance source may demand that the dealer repurchase the contract. If the dealer can find the car the losses are generally tallied in the thousands. If the dealer cannot find the car, the losses are usually tallied in the tens of thousands. So how does a dealer avoid these liabilities?
Negotiate the Master Dealer Agreement.
The representations and warranties accompanying retail installment sale contracts are contained in the master dealer agreement. Dealers should negotiate the terms of those agreements to be sure that they can comply with them.
The details of the lender’s rights and remedies in the master dealer agreement are critical to a dealer if a customer defaults and the creditor wants the dealer to buy the RISC back. Dealers must understand what they represent and warrant. They must be sure that they can comply. Preferably, they should have you as their counsel review these agreements because of the substantial losses that can be generated when there is an alleged breach of a representation and warranty.
Here are some things to watch out for.
Warranty of Customer Information. Some agreements require dealers to warrant not only what they know and represent to the lender about the customer, but also that everything the customer has represented is true. While it is reasonable for the lender to require the dealer to represent that it has told the lender what it knows, it is overreaching for the lender to require a dealer to guarantee the truth of all representations made by the consumer. Any such warranty or representation should contain a “knowledge” of the dealer qualifier.
Insurance. Does the agreement require the dealer to verify insurance? Or does the agreement require the dealer to guarantee that fully paid insurance covers the vehicle for an extended duration? A lender requirement that the dealer verify insurance is appropriate. A lender requirement that the dealer guarantee the existence of insurance for an extended period is overreaching.
Vehicle Service. Does the agreement provide that the dealer will provide manufacturer-required maintenance and service? Clearly, the dealer has no control over whether the buyer will return to it for service, and a guarantee that the vehicle will be serviced according to manufacturer requirements often cannot be met.
Delivery Prior to Assignment. Does the agreement include a representation by the dealer that the vehicle was not delivered to the customer prior to assignment of the contract to the lender? In spot delivery situations, vehicles are always delivered to the customer prior to assignment of the contract to the lender. This is an obsolete representation that should be deleted.
Time to perfect a security lien. What period is given to the dealer to perfect a security lien? U. S. bankruptcy law was changed a few years ago to extend the period for perfection from twenty to thirty days. However, some agreements still require that liens be perfected within twenty days.
Sale of other products. Does the agreement limit the sale of other products such as extended service agreements? If so, is there a process for approval of the products the dealer sells? Or does the lender reserve to itself the right to determine what products may be sold? Quite clearly, the dealer should have an opportunity to sell its products in connection with a RISC assigned to a lender.
Scope of indemnification. For what does the dealer indemnify the lender? The lender is entitled to ask for indemnification for breaches of the indirect finance agreement or for improper actions by the dealer. However, the creditor should not require a dealer to indemnify a creditor against problems caused by the creditor, including actions as a result of the form retail installment sale contract or other documents that the creditor prepares and requires.
Complaints. Does the creditor have the right to demand that the dealer repurchase a RISC if the customer makes a complaint against the dealer? Or does that right accrue only after there has been some determination of the customer’s rights that affects the rights of the creditor under the retail installment sale contract? Never agree that a RISC can be tendered simply because there is a complaint raised by the customer or because there is a dispute between the customer and dealer before there is a decision about that dispute.
Remedies of the creditor. Be careful of the remedies of the creditor if there is a breach of the agreement. The creditor is entitled to demand that it may tender the RISC for repurchase. However, some master dealer agreements provide that upon a breach, the creditor can re-tender the entire portfolio. That is never acceptable.
Dealer/lender disputes. Where are dealer/lender disputes required to be determined? Where the lender does business? Or where the dealer does business? The lender comes to the dealer at the dealer’s location to have the dealer enter the master dealer agreement. If there is a dispute it should be decided where the dealer is located.
Many dealers assume that lenders will not negotiate the terms of the master dealer agreements. As with all agreements, the flexibility of the lenders depends upon the perceived market power of the parties. If a lender wishes to enter the dealer’s market or wants to establish a business relationship with the dealer, it is likely to have flexibility. If a dealer is chasing the lender to establish the relationship, there is likely to be less flexibility in the lender’s position. In any event, a dealer will not know what can be achieved until it engages the lender, or has you engage the lender, to discuss provisions of the agreement that the dealer finds onerous or oppressive.
Demands for Repurchase
In difficult financial times, finance sources are especially aggressive in their demands to repurchase contracts when the customer has defaulted. A dealer must carefully scrutinize every demand and challenge claims that the dealer did not comply with the master dealer agreement. Here are some common issues that finance companies raise.
- The deal contains a promissory note or a hold check for the down payment. What does the indirect finance agreement say? A hold check or a promissory note should not be a problem if the instrument was collected before the dealer assigned the retail installment sale contract to the finance company, but that depends upon the language of the master dealer agreement.
- The customer does not have insurance. What does the agreement say? If the dealer was careful in negotiating the agreement provision on insurance, the dealer should only have been required to verify insurance at the time the retail installment sale contract was done.
- The debtor’s signature or the cosigner’s signature on the RISC was forged. A finance company may even have an affidavit of forgery. A dealer should not blindly accept a claim of forgery. Customers unhappy with their obligations, especially cosigners, will often complain that they never signed the RISC. Check the details of the transaction carefully. If the dealer can prove that the RISC was appropriately signed, it should challenge the finance company as well as the customer claiming a forgery.
- The customer went bankrupt and the lien was not perfected in time. Under Federal bankruptcy law, a dealer has 30 days from the time the customer takes possession of the vehicle to perfect the lien and protect the creditor’s security in the event the customer declares bankruptcy. Under Virginia law, perfection is achieved when the paperwork is processed or filed, not when DMV finally notes the lien. A dealer should carefully check the claim of the finance company. If the vehicle was delivered after the papers were signed, it is the delivery date that controls. In Virginia where a lien is deemed perfected when the paperwork is filed or processed, the dealer may have complied with its obligation.
A solid policy may protect a dealer against significant losses. In difficult times, that may be the difference between making it through or not.